How To Find Expansion Financing

Trade Credit

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you are using trade credit. One drawback to trade credit is that it can be expensive. A supplier who offers a 2 percent discount on bills paid within 10 days, with the full or net amount due in 30 days, is actually charging a 36 percent annual rate of interest.

Angel Investors

An angel investor is an individual who invests his or her own money in an entrepreneurial company. This distinguishes them from institutional financiers, who invest other people's money. Angels come in two varieties: those you know and those you don't know. They may include professionals such as doctors and lawyers; business associates such as executives, suppliers and customers; and even other entrepreneurs. Unlike venture capitalists and bankers, many angels are not motivated solely by profit. Particularly if your angel is a current or former entrepreneur, he or she may be motivated as much by the enjoyment of helping a young business succeed as by the money he or she stands to gain. Angels are more likely than venture capitalists to be persuaded by an entrepreneur's drive to succeed, persistence and mental discipline.

Initial Public Offerings

Large amounts of capital have been raised in recent years by small companies that went public. Initial public offerings (IPOs) have made instant billionaires of entrepreneurs such as Yahoo's Jerry Yang and's Mark Cuban. The same IPOs flooded the coffers of the companies with millions, if not billions, of dollars.

Going public isn't for every firm, however. The ideal candidate for an IPO has both a well-established track record of steadily growing sales and earnings, and operates in an industry that currently is in the news. You may be able to go public if you have a whole lot of one of these characteristics and not much of the other--for instance, little earnings but lots of public interest have characterized many biotech and Internet-related IPOs in recent years.

The stringent requirements for IPOs leave out most companies, including those that don't have audited financials for the last several years, as well as those that operate in slow-growing or obscure industries such as car washes and paper clip manufacturing. And IPOs take lots of time. You'll need to add outside directors to your board and clean up the terms of any sweetheart deals with managers, family or board members as well as have a major accounting firm audit your operations for several years before going public. In other words, if you need money to grow today, an IPO isn't going to provide it.

An IPO is also probably the most expensive way to raise money in terms of the amounts you have to lay out upfront. The bills for accountants, lawyers, printing and miscellaneous fees for even a modest IPO will easily reach six figures. For this reason, IPOs are best used to raise amounts at least equal to millions of dollars in equity capital.

Employee Stock Ownership Plans

Employee stock ownership plans (ESOPs) allow owners of privately held companies to share ownership with employees. Technically, ESOPs are defined-contribution employee benefit plans that invest primarily in the stock of the employer company. As such, most ESOPs distribute the stock to employees as a benefit, rather than selling employees the shares. ESOPs are commonly used to give retiring owners a way to cash out all or part of their holdings without selling the entire company. But creating a market for shares of the company can also be used to raise funds for expansion. ESOPs are easy to set up and are used by thousands of employers.

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